Business Falls Off At End Of Second Quarter

Jim Phillips, Yarn Market Editor

A s the first half of the year draws to a close, yarn spinners find themselves in the
recently uncommon position of facing uncertainties and asking questions about deteriorating
business conditions.

For the past 18 months, the industry has seen a steady stream of business, often operating
at full capacity — especially in ring-spun yarns — and with a healthy backlog of orders. Then,
beginning about eight weeks ago, some spinners noticed the beginnings of a slowdown. And within the
past four to six weeks, orders have been off substantially.

"Right now, I'm not really sure what's going on," said one Southeastern spinner. "Orders are
definitely off a bit. Certainly, I would not classify business as bad, but it is not as brisk as it
has been. We've been on a roll for a long time, and this is the first indication we have seen that
it might be coming to an end."

Multiple spinners speculate that the recent slowdown might be attributable to several
factors. "We saw from recent reports that economic growth in the past month or so has slowed
somewhat," said one spinner. "Because of manufacturing and business cycles, many of the
dramatically higher prices we've seen over the past six months only recently hit at retail. We're
thinking that at least some of the recent slowdown is a result of consumer sticker shock."

Said another spinner: "Right now, I would say that business is off for multiple reasons.
Price, I believe, is a factor, both for our customers and consumers at retail. But also, we believe
that the supply pipeline is currently full. During the economic crisis, many retailers let their
stocks dwindle to almost nothing. And when they did place orders to restock, they only bought just
enough to replace what they had sold. What's happening now is that the pipeline is full and
retailers have sufficient inventory — or even excess inventory — and have slowed down their
buying."

Even further, some spinners speculate that a period of panic buying has come to an end. "We
had a period there for awhile when capacity was so tight that many customers were afraid that if
they did not place orders, they would be unable to get a position with a yarn manufacturer. So, to
hedge against not having product, they placed orders for more than they needed. As capacity has
become more available, they have reverted back to their normal practice of only buying enough
product to fill their orders."

Third Quarter Uncertain With the recent decrease in the volume and frequency of orders, yarn spinners are uncertain
of what the last half of the year will bring. "Right now, it's anybody's guess," said one spinner.
"Is what we've seen over the past few weeks just a glitch, or is it an indicator of what we will
see through the end of the year?"

Another spinner said, "We still remain cautiously optimistic that business will be steady,
if not spectacular, over the remaining portion of the year. Right now, we think that as inventories
at various points in the supply chain began to shrink once again, we will see more robust
conditions."

Price Pressures Remain Yarn spinners remain under increasing pressure to reduce prices, especially in light of the
recent and rapid drop in cotton prices. "Price is always an issue, and it has become increasingly
so in the past few weeks," said one spinner. "Customers see that raw material prices are dropping
and want an immediate and corresponding drop in yarn prices. But it doesn't work that way. Spinners
are still making yarn from cotton they bought when prices were much, much higher."

If there is any good news coming out of recent developments, it is that many spinners now
have ample capacity to accept new orders and turn them around in a relatively timely manner. "A few
months ago, we were struggling to deliver product as quickly as we had been able to do so
previously," said one spinner. "We are certainly in a position now to accept orders and turn them."